Economic update: a mixed picture points to a continuation of modest growth

The current macroeconomic environment provides a mixed outlook, with reasons to be both positive about the state of the economy as well as some areas of concern. The puts and takes of the outlook are translating into growth of approximately 2 percent for our economy, which is modest but consistent with the trend since the beginning of the recovery in 2009.

On the positive side, Presidents Trump and Xi remain in communication despite continuing trade tensions between the U.S. and China, and a face to face meeting is scheduled for October 10. Recently, China has increased their purchases of U.S. agricultural products and there is some optimism that the two sides can agree to terms that will result in a de-escalation of tensions while paving the way for a more significant agreement in the future. Of course, any resolutions on the trade front reduce a significant source of uncertainty in the market and would be positive for stocks.

In addition, U.S. consumers are healthy and corporate earnings growth remains solid. Several retailers have recently commented on the strength of the U.S. consumer, including Home Depot, Target, Walmart, Starbucks, and others. Consumer strength is also evident in spending levels, where recent data show that personal consumption grew more than 4 percent year over year. On the corporate side, companies in the S&P 500 reported earnings growth of about 2 percent and sales growth of about 4 percent last quarter. Many analysts had expected that earnings would decline, but for the second consecutive quarter results were better than had been feared.

To keep the economic expansion intact, central banks around the world have been cutting interest rates and are boosting their levels of stimulus. In fact, the Federal Reserve’s rate cut on July 31 was followed by a two-week period in which 18 other central banks followed suit and lowered rates. Notably, low interest rates are supportive of higher equity valuations and are intended to provide an incentive for investors to buy stocks rather than safe-haven assets such as high-quality bonds.

Regarding the housing market, it has been somewhat mixed. On the positive side, low interest rates have resulted in historically inexpensive mortgages, which add to the appeal of homeownership. After a period of stability in issuance of building permits, recent activity has picked up. However, home ownership rates are relatively low, in a historical context, as first-time homebuyers must save enough money for sizeable down payments as well as absorb higher costs from land to construction materials. Even existing homeowners have moderated their spending levels, with private residential investment staying about the same to slightly down since 2018.

On the negative side, global growth is slowing. In Europe, England is dealing with a potential “hard exit” from the European Union, and the German economy is close to a recession. In the U.S., although companies are projected to grow earnings 8-10 percent next year, those estimates may be revised downward if international economic conditions continue to remain challenging.

In terms of investment on behalf of businesses, continued economic uncertainty has resulted in companies proceeding cautiously with plans for capital spending and hiring. Recent data show capital goods orders declined 1.7 percent year over year, continuing the downward investment trend that started in 2017. Furthermore, gauges of manufacturing activity have slid into contractionary territory for the first time since 2016.

Given the mixed macroeconomic environment, we continue to closely watch leading and coincident indicators as they provide signals of a potential change in the outlook. At this juncture, those indicators suggest the economy is poised for modest growth much like we have seen over the last ten years. In order to navigate through the inevitable ups and downs of the economic cycle, our strategy remains focused on investing in high quality companies with sustainable competitive advantages. We believe companies with these characteristics will continue to be attractive investments over the long term.